Brunner Test Does Not Require that Debtor Take Advantage of IBR

Posted by NCBRC - May 3, 2018

Willie West was 60 years old, had been largely unemployed for thirty years and owed over $60,000 in student loans. He lived rent-free with his aunt and received $197.00 under the Supplemental Nutrition Assistance Program. When he sought to discharge the loans in bankruptcy the case came before the court on the parties’ cross-motions for summary judgment. West v. U. S. Dept. of Ed., No. 17-20506, AP No. 17-78 (Bankr. W.D. Tenn. Feb. 4, 2018).

The Sixth Circuit applies the three-pronged Brunner test to undue hardship discharge for student loans under section 523(a)(8). Citing Barrett v. Educ. Credit Mgmt. Corp. (In re Barrett), 487 F.3d 353 (6th Cir. 2007), the court rejected the DOE’s argument that Mr. West could not satisfy the first prong of Brunner by showing that he could not maintain a minimal standard of living if he repaid the loans because he was eligible for an IBR under which he would make no monthly payments. The court reasoned that if a debtor must enroll in an IBR to satisfy the first (or third) prong of Brunner, undue hardship discharge for student loans would effectively be eliminated, as any debtor eligible for an undue hardship discharge would also be eligible for an IBR.

The court further found that “the first prong of the Brunner test is not limited to a debtor’s monthly payment, but, instead, is based on the entire impact the student loan will have on a debtor’s ability to maintain a minimal standard of living.” Here, the fact that ultimate forgiveness of the loan would likely saddle Mr. West with a nondischargeable tax debt in the tens of thousands when he was in his eighties and highly unlikely to have a greater income, would largely erased any benefit he might derive from an IBR. The mere possibility of a tax waiver due to insolvency was poor solace to the debtor who would have to live with that uncertainty. The court found that this ran contrary to bankruptcy’s goal of affording the honest but unfortunate debtor a fresh start.

Applying the “difficult to satisfy” second prong of the Brunner test, the court looked at whether Mr. West’s financial situation was likely to persist. He testified that he had searched for work and finally concluded that, due to his race, age and criminal record, his job prospects were nonexistent. The court found that he established a genuine issue of fact as to whether his financial condition met the Sixth Circuit’s “certainty of hopelessness” standard but that his credibility was an issue to be determined by the trier of fact. For that reason, the court denied both motions for summary judgment on that issue.

The court went on to address Brunner’s third, good faith, prong. The DOE argued that Mr. West did not make a good faith effort to repay the $60,000 loan because he never made any payments even though he did occasional odd jobs for $10 or $15. The court was unpersuaded that Mr. West’s failure to apply his negligible income to his student loan, when he did not have enough income to pay for housing and had a $197.00 food allowance as his only regular income, was an indication of bad faith. Moreover, Mr. West and the DOE had entered into forbearance agreements from the start, so the DOE’s insistence that he use his meager income to pay off debt he was under no obligation to pay engendered no sympathy from the court. Nonetheless, the court denied both parties’ summary judgment motions on this point finding that the record was insufficient to establish that Mr. West’s failure to gain employment for thirty years was reasonable.

The court thus granted summary judgment to the debtor on the first prong of Brunner and denied summary judgment as to both parties on the two remaining prongs of the Brunner test.

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